Credit growth in terms of lira from local branches of the banks to private non-financial sector, increased after the 2008 except 2018 Sudden Stop in Turkey. Rapid credit expansion periods are visible and credit booms occurred between 2013 and 2015, in 2017 and in 2019. In the later periods duration of credit booms are shorter but the volumes are larger. Fall in interest rates are effective on the credit boom between 2013 and 2015, and in 2019 but the credit boom in 2017 is caused by Treasury support provided to Credit Guarantee Fund (KGF) in 2016 and the amount of support increased from 2 billion Turkish lira to 20 Billion Turkish lira in 2017.

Credit Growth in terms of foreign exchange basket from local branches of the banks to private non-financial sector, had increased with the capital inflow to Turkey between 2009 and 2013. Increase of foreign exchange dominated credits decreased during the European Debt crisis. The effect of funding of the Public-Private Partnership (PPP) projects should be noticed. For those who interested in PPP projects’ effects on foreign currency indebtedness of private non-financial sector in Turkey may review the Çolak and Yılmaz (2017) and 23. Financial Stability Report page 31.

In the lira-denominated credit boom of 2013-2015, the amount of newly issued credits from private and public banks are nearly similar while in the credit boom of 2017 and 2019 it is obvious that, public banks are the motor of the credit growth. Also, the participation banks, which have a small effect on credit growth, increased the amount of lira-denominated credits issued to private non-financial sector at a remarkable rate after the 2016.

The error in the graph between private and foreign deposit banks in the first quarter of 2016 arose due to locally-owned private deposit bank was sold to a foreign bank.

On the other hand, credit growth in terms of the foreign exchange basket increased with the capital inflows and it was provided largely by the private banks and it decreased after 2015. Participation banks have increased the amount of foreign currency credit after 2017, similar to the credits they issued in terms of the lira.

Credit Guarantee Fund (KGF) was established in 1991 and started to act as a guarantor for credits to non-financial private sector since ’94. The guarantees given by KGF remained low until 2015. After the Treasury support provided in December 2016 and the amount of which was further increased in March 2017, credits guaranteed by KGF increased at an unprecedented level.

Unfortunately, KGF had not published its 2019 and 2020 annual reports in English. Also, the Turkish version of the activity report of 2019 had published simultaneously with the 2020 annual report in 2021. A snapshot provided by archive.org for 26.09.2020 proves that.

KGF publishes the amount of credit guaranteed by them, in nominal terms and without discriminating the foreign currency and lira units of credit, thus the calculations in this part will be over nominal terms while ignoring the valuation effect of foreign currencies.

Between 1994 and 2015 KGF provided guarantee to near 10 billion lira of credit (second value from right) and the amount increased to 6.682 million lira in 2016, near 208 billion lira in 2017, near 86 billion lira in 2018, 73.5 billion lira in 2019 and 203.5 billion lira in 2020. Which corresponds to 75.3% of the credit growth in 2017, 38% of the credit growths in 2018, 39.1% of the credit growth in 2019, and 23.8% of the credit growth in 2020 in nominal terms.

In addition, in case the KGF guaranteed credits go into default, it is possible that these losses may expose itself to the fiscal space by the duty losses of the public banks and requirement of funding from the treasury for bailing out those losses by KGF. The increase of duty losses of public banks and the support provided KGF by treasury are noticeable especially after 2017. However, there are also losses arising from the foreign exchange among those.

For readers unfamiliar with the income statement, there is a basic explanation. Profits are equal to the sum of operating profits, net income from other operations, extraordinary net income minus financing expenses and taxes. Operational profit is net sales minus cost of goods sold and operating expenses. When cost increases relative to net sales or net sales decreases relative to costs, operational profits decrease. Moreover, other operations accounts contain foreign exchange losses and profits, which constitutes a large part of that account and which is more volatile than other components. It will be a proxy for foreign exchange shocks on profits. Also, extraordinary net incomes include losses and earnings from fixed assets sales, excluding other expenses account. This ratio is negative if the assets are sold at a lower price than its depreciated price, which indicates the need for liquidity. Financial expenses are interest payments of short and long-term credits. These accounts form profits before taxes. Extracting provisions for taxes and other liabilities to the government from that equals net profit.

During the period, operating profits changes with the size and type of the firms. Operating profits to net sales decreases as firm size gets smaller. Also, small medium and micro sized firms decreasing operating profits to net sales ratio increases after 2016. For large-scale companies, this fluctuation continues around 2014. While this ratio increases at the end of the period for large and medium sized companies, for small and micro sized companies that ratio changes with the type of the firm. Small and micro sized tradable sectors increased the ratio with exports, non-tradable sectors’ operating profits to net sales ratio decreased compared to 2009.

Even though the net income from other operations to net sales ratio varies, it decreases in the years when the Turkish lira depreciated except for small sized firms. The net income from other operations to net sales ratio is close to the operating profits to net sales which confirms the thesis of Demiröz and Erdem (2018) that with the liberalization of capital accounts, the effectiveness of accounts other than operating income increased in the income statement. In brief, losses resulting from the depreciation of the lira can be analyzed through this account.

The ratio of financing expenses to earnings before interest and tax (EBIT) shows the companies’ profits and their ability to pay the interests of their long and short term credits.By adding extraordinary revenues and financing expenses to EBIT, profit before tax is obtained. As extraordinary income is relatively smaller than finance expenses, the increase in finance costs is more robust variable for the decrease in profit before tax.

During the period, with the increase in the use of credit as an external finance source by the private non-financial firms, interest payments increased, and consequently, the profitability in non-tradable sectors decreased, and the profitability in the tradable sectors remained stable with the effect of exports. Another noteworthy thing is small and micro-sized firms with relatively low long and short-term financial liabilities seem to have high financing expenses due to low profit before tax margins.

Non-tradable sectors with increasing operating profits towards the end of the period have lower profit to net sales ratio compared to the 2009 due to increased financing costs and exchange rate shocks. However, tradable sectors able to keep their profit to net sales ratio within a certain range with the exports. Besides the relatively small operating profits to net sales ratio, micro-sized firms constitute 62.5% of the overall number of firms and during the periods they are usually at a loss which indicates the importance of the tax restructuring policies implemented by the government for those firms.

During the period financial liabilities of the firms had increased. The ratio of financial liabilities to total liabilities of large and medium-sized non-tradable sectors had surpassed the tradable sectors of the same size. Also, the difference of that ratio between small and micro-sized tradable and non-tradable sectors decreases through the period. That increase in financial liabilities of non-tradable sectors caused by use of long-term credits by that sectors.

Another indicator related to indebtedness is the trade and other debts. The increase in these debts may show the size of indebtedness within and between the sectors. The ratio of trade and other debts to total liabilities increasing through the period. This ratio changes for the large-sized firms according to the type of the firm. After 2012, this ratio remained rather stable for the tradable sectors while increasing for the non-tradable sectors.

The liabilities of the firms increased during the period. The high indebtedness of the firms increases the fragility of the economy. In a case of sudden income shock, that indebtedness may ignite a debt crisis, and with the increasing use of credit that crisis may stress the financial system. Since the individual conditions of the firms and their relation with the banks cannot be evaluated through the aggregated dataset, the transmission of defaulted debts across sectors and which banks will be affected cannot be shown.

In this part, firms ability to the pay their short-term liabilities with the current assets and acid test score will be checked. From the graph below, it can be interpreted that all private non-financial firms able to compensate their short-term liabilities with their current assets but when the inventories excluded from the current assets, in other word the acid test score, firms are unable to reimburse their short-term liabilities regardless of their size.

With the increasing use of credit throughout the period, non-tradable sectors have lower profit margins compared to the past due to increased financing costs and exchange rate shocks. Interest payments supresses profits of those sectors which confirms the Bernanke and Gertler (1995) thesis, use of credit as an external finance in an environment where the interests are increasing, decreases the profits since the financial expenses to earning before interest and tax rate is increasing. Tradable sectors, on the other hand, kept their profits constant within a certain range according to their size, with increasing export revenues with the depreciation of the lira. Government’s tax resturcturing policies have created an important source of income for micro-sized companies, but created a burden on public revenues.

Also, the trade and other debts of firms had increased, as well as their financial liabilities. In addition, the commercial and other debt of companies increased, as well as their financial debts. It does not seem possible for firms to pay these debts without selling their inventories. Indebtedness of firms had turned into a threat not only for banks but also to the other sectors in the pandemic era.

In orthodox economic theory, firms use external finance for increasing their investment and decrease their production costs which in the long-run increases profits. However, that external finance can also be used for sustaining liquidity and capital requirement, and for payments of those debts. In that case proportion of external finance left for investment and internal finance determines the level of investment.

Financial liabilities to total liabilities ratio increases while the short-term trade and other debts to total liabilities are decreasing for non-tradable medium, small, and micro-sized sectors and the tradable large, small, and micro-sized sectors in 2018. That shows the portion of the external finance left for investment had decreased in that year.

In addition, profits of non-tradable sectors that stressed as a result of increased financing expenses may stumble the internal financing sources. Since those sectors compose 42% of the total balance sheet size of the private non-financial sector, interest payments may decrease overall spending on capital goods.

Also, short-term liabilities cannot be compensated with liquid assets which means firms need to sell their inventories or produce goods with them while the maturities of credits increased by rearrangements or/and generate enough external or internal finance. With the credit boom in 2020 firms may buy some time but due to disruptions in the economy, it might not be enough.

The risk of KGF guaranteed credits go into default increased with the income shock caused by the pandemic. Also, duty losses of the state banks emerged by the KGF guaranteed credits, and bailing outs of KGF guaranteed credits issued by both private and public banks may transmit the cost of defaulted credits to fiscal space. The increase in duty losses of public banks and the size of the support provided to KGF by the treasury within the period is noticeable after 2017. This situation worsens the treasury balance sheet, which is already running a budget deficit and worsened under pandemic conditions.

In addition, credits that principal and/or interests payments had delayed 3 to 12 months increased during the period notably after 2018 Sudden Stop. However, with the pandemic the maturity of those risky credits had delayed to the end of 2020 which later delayed again to the end of the first half of the 2021. Default risk of those credits might had a negative impact on government budget since credits from local branches of the banks to private non-financial credits had issued predominantly from the public banks and guaranteed usually by the KGF which supported by the treasury.

There are few sources for Turkey’s credit data. One of them is the Bank for International Settlements (BIS) dataset; another one is CBRT. BIS dataset contains quarterly credit to households, non-financial firms and general government from banks and all sectors. However, we could not differentiate the credit in local currency and foreign exchange terms from that dataset, so eliminating valuation effects is not possible. Instead, CBRT’s dataset will be used to obtain credit to non-financial firms from banks. Even though the credit from banks’ local branches might be used as a proxy for that purpose; that data lead to a bias. After all, the data contains credits to households and non-financial firms with their credit card expenditure. Also, cyclicality of consumer credit might differ from credit to firms in specific periods which creates a bias for quarterly changes of credit. Extracting the credits to households and individuals credit card expenditures from that data will lead us to credits to non-financial firms from banks in terms of currency units and types of banks. Also, the effect of inflation and valuation of the exchange rate from the data is eliminated by using the inflation data from CBRT and basket of foreign exchange that weighs Dollar and Euro at the same rate.

For sectoral indicators, balance sheets and income statements from CBRT’s Company Accounts are used. Dataset separates companies according to their size. Moreover, sectoral data categorized as tradable and non-tradable by the author for easing the evaluation, but that caused some problems.

First and foremost, there are many methods to classify the tradability of each sector. Depending on some openness ratio, a sector is classified as a tradable sector; however, that ratio is not reconsidered for sizes of the firms that amass that specific sector. For instance, agriculture is accepted as a tradable sector though the exports’ share of sales decreases with the size of the firms. Large agricultural firms’ exports consist of 30% of total sales while that ratio decreases to 2.8% for micro-sized agricultural firms. Nonetheless, construction firms usually accepted as a non-tradable sector, but large construction firms’ exports to sales are 10%. Sectors that classified as a tradable need to change with the size of the firms. Also, the openness of a sector may change in time. In this paper, a sector is assumed to be tradable if its export to sales ratio is larger or equal to 7.5% for equal or more than four years.

Also, some sectors’ relative size in tradable and non-tradable sectors might be large and mislead the result; thus, firms’ relative sizes and export to sales ratios can be reached from this link.